China is increasingly focused on greater alignment with her Eastern neighbours and the allure of Russia’s resource-rich economy and the demise of US power have caused China to recalibrate foreign policy.
China and Russia have resolved outstanding border disputes and become closer in terms of diplomatic coordination.
There is now over $50bn of bilateral trade between them with a high percentage relating to military hardware. Furthermore, Chinese investment has been secured for the oil industry via Rosneft and finally, cultural exchanges are now a regular facet of their relationship. On the face of it, this should be of concern to the West from a geopolitical standpoint but the economic reality is that China is inextricably woven into American hegemony.
Over the last 10 years, China has become America’s principle creditor, soaking up more and more debt as the US looked increasingly to international markets to bolster a weak domestic situation. The challenge for investors is whether China will continue with this policy or start to curtail this support.
As a general rule of thumb, investors should “buy what China consumes and sell what China makes”. Some might argue this is somewhat simplistic, but it is fundamental to a Western investment approach and is supported by economic data showing increased consumer inflation and trade data highlighting surpluses in finished goods.
With the rest of the global economy so fragile, although inflation is rising because the country is now such a large component of the global economic picture (set to overtake Japan as the world’s number two behind the US) it would not take a great deal to start a global deflationary trend. This is politically and economically unpalatable.
There is plenty of evidence the growth spurt reflected in the GDP data for 2009 will be dampened. Investors should be wary of direct investment in equity and debt markets, conscious of the lack of regulatory control and real reform. Far more attractive is the export potential into China with an eye on currency movement and any relaxation of currency controls.
Dawn Kendall is head of product development and investment strategy at Architas
